Mahindra & Mahindra Financial Services Ltd. share price target

AUM growth remained healthy at 22% YoY to | 71406 crore, led by traction in auto loans, particularly CV/CE and tractor segment. However, disbursement growth remained muted at | 10598 crore, up 3% YoY due to cautious curtailment in SME lending & slowdown in auto sector. Overall asset mix remained broadly stable with CV gaining prominence over SME. The management has guided 10-12% YoY growth in advances for FY20E. Within subsidiaries, growth reported by Mahindra Housing Finance witnessed a slowdown with 11%YoY growth in advances & 7% YoY degrowth in earnings to | 7872 crore and | 29 crore, respectively. Pressure on...

MMFS reported PAT of INR0.7b, significantly below our estimate of INR3.2b, due to higher-than-expected operating expenses and a sharp jump in provisions. As 1Q is a seasonally weak quarter, the These two factors resulted in an unexpectedly high credit cost of INR6.2b for the quarter. Despite a slowdown in OEM volumes, MMFS has been able to deliver strong AUM growth, driven by its diversification into new product segments (such as pre-owned vehicles and CV/CE) and increasing share in different OEMs. While the company is likely to gain market share, we expect AUM growth to moderate to 14% YoY by year-end. Asset quality performance has been in line with expectations; however, up- fronting of provisions on stage 3 assets and movement within stages 1-3 of loans (based on macros) are likely to keep credit costs volatile. We cut our estimates for PPoP by 5-7% and PAT by 15-18% to factor in higher credit costs.

A sustained and relentless focus on collections translated into sustained asset quality improvement. Vulnerability to rural stress persists, although reducing. The impact of upcoming elections and monsoon are key monitorables. In spite of continued mkt share gains and subdued competition from smaller NBFCs, we expect lackluster auto growth to impact MMFS. Better than expected improvement in asset quality (GNPAs: ~5.9%) and provision reversals (~Rs 1.15bn) drove PAT (+95/88%). Maintain BUY with a TP of Rs 504 (2.75x Mar-21E ABV of Rs 177 + Rs 18 for MIBL)

Healthy advances growth at 26% YoY to | 61250 crore, led by auto loans, particularly CV/CE & tractor segment. Disbursement growth remained muted at | 11725 crore, due to cautious curtailment in SME lending. Overall asset mix remained broadly stable with CV gaining prominence over SME. The management has guided 10-12% YoY growth in advances for FY20E;...

Improvement in asset quality was the key positive in the quarter. This was also reflected in volume terms, with the number of NPL contracts down ~30% QoQ. However, MMFS lowered its PCR on Stage 3 GNPLs to 19% from 27% in the prior quarter, which Over the past six quarters, MMFS has witnessed a significant improvement on most parameters AUM growth, margins and asset quality. The company has been gaining market share across all existing products and has expanded into newer products like pre-owned vehicles and CV/CE. NPLs have declined to a multi-quarter low. With strong AUM growth, improved branch productivity and low credit costs, MMFS is likely to maintain 2.5% RoA/16% RoE over the medium term, in our view. Value of assets financed for SMEs declined sharply from INR18b to INR1b, while that in vehicle finance increased 16% YoY to INR116b.

Strong business momentum led by rural cash flow, high NIM For MMFS, AUM has grown at 23% CAGR with volatile spells in FY09-18. AUM grew at 32% CAGR in 09-14, slowed down in FY15-17 to 10% and then revived to 16% in FY16-18 to | 55,100 crore. We expect AUM to grow at 20% CAGR in FY19-21E to | 94,996 crore. Robust infrastructure spends and recent farmer friendly schemes are expected to support rural cash flows. Current NIM at ~8% is expected to remain stable over the next two years as it has already moderated from highs of 9.2% in the past....

In spite of a challenging environment and tight liquidity, asset quality improved by write-offs and seasonal improvement. Gross and Net non-performing asset (NPA) ratios (stage 3) improved by 130 bps and 20 bps sequentially in Q3FY19 to 7.7% and 5.8%, respectively. Importantly, the number of NPLs contracts declined QoQ, implying improvement in the underlying trend. However, higher write-offs led to decline (800 bps QoQ) in provision coverage ratio (PCR) to 26.9%. Going forward, we expect rural cash flow to improve with increased government focus on rural initiatives, hence, collections will improve further. Thus, we project Gross/Net NPA ratios...

Maintain BUY with an SOTP of Rs 498 (2.75x Dec-20 ABV of Rs 174.5 + Rs 18 for MIBL). MMFS robust disbursal (+24/22%) and AUM (+31/6%) growth sustained. Asset quality improved as Gross/Net Stage III dipped further, by ~130/20bps to ~7.7/5.8% (in part, optical, due to higher w/os at ~Rs 9.85bn i.e. 17% of Op. Gross Stage III). Calc. NIMs were sequentially flat at ~7.9%. Notably, MMFS continues to expand its reach (added 17 branches in 3Q and 135 in the last 12 months).

MMFS reported PAT of INR3.2b (14% miss), driven by higher-than- expected opex and tax rate. Adjusted for INR500m profit on MIBL stake sale in 3QFY18, PAT declined by 8% YoY. AUM and disbursements remained on a robust growth trajectory. grew 6% QoQ (+30% YoY) to INR631b. MMFS maintained spreads on a sequential basis at 6.9%, despite a 26bp sequential increase in cost of funds to 8.76%. Total provisions as a percentage of loans stood at 1.9% v/s 3.0% a quarter ago and 4.1% a year ago. PCR including standard assets provisions declined QoQ by 1,000bp to ~49%. This was largely due to write-off of INR9.85b during the quarter.

Net interest income (NII) grew at a robust pace of 28% YoY (in line with our expectation) supported by 35 bps expansion in net interest margin (NIM) to 7.8% in Q2FY19. NIM improved as improving asset quality helped the company to outweigh rise in cost of funds. Cost to income (C/I) ratio declined by 453 bps YoY to 35.1% as operating efficiency kicked in. As a result, pre-provisioning profit increased at a faster pace of 38% YoY. Net profit jumped by 4.9x YoY mainly due to low base of Q2FY18. Going forward, we expect net profit to increase at a CAGR of 35% over FY18-20E on the back of improving NIM (~8.2%) and declining provisioning expenses....